The NBER's Second Annual InterAmerican Seminar on Economics,
cosponsored by the Pontifica Universidade Catolica do Rio de Janeiro (PUC) and FEDESARROLLO, was held in Bogota, Colombia, on March 30-April
1. Sebastian Edwards, NBER and University of California at Los Angeles,
and Edmar Bacha, PUC-Rio de Janeiro, organized the following program:

Opening Remarks: Luis Fernando Alarcon, Minister

of Finance, Colombia

Rudiger Dornbusch, NBER and MIT, and Sebastian

Edwards, "Economic Crises and the

Macroeconomics of Populism in Latin America: Lessons

from Chile and Peru" (NBER Working Paper No.

2986)

Discussants: Jose Pablo Arellano, CIEPLAN, and

Antonio Urdinola, ECLAC-Bogota

Edmar Bacha, "A Three-Gap Model of Foreign

Transfers and the GDP Growth in Developing Countries"

Discussants: Leonardo Villar, FEDESARROLLO,

and Daniel Heyman, ECLAS-Argentina

Raquel Fernandez, NBER and Boston University,

and Jacob Glazer, Boston University, "The Scope

for Collusive Behavior among Debtors in a

Model of Sovereign-Debt Renegotiation with Costly

Penalties"

Discussant: Mauricio Cabrera, former Head of Public

Credit, Colombia

Eduardo Borensztein, International Monetary Fund,

"Debt Overhang, Credit Rationing, and Investment"

Discussants: Patricia Correa, Banco de la Republica,

and Juan Jose Echavarria, FEDESARROLLO

Armando Montenegro, Advisor to the Monetary Board,

Colombia, "The Economics of a Regulated Export

Sector: Coffee in Colombia"

Discussants: Roberto Steiner, Banco de la Republica,

and Vinod Thomas, The World Bank

Edward E. Leamer, NBER and University of California

at Los Angeles, "Latin America as a Target of Trade

Barriers Erected by the Major Developed Countries

in 1983"

Discussant: Gustavo H.B. Franco, PUC-Rio de Janeiro

Jose Antonio Ocampo, FEDESARROLLO, "Import

Controls, Prices, and Economic Activity in

Colombia"

Discussants: Anne O. Krueger, NBER and Duke

University, and Ricardo Chica, FEDESARROLLO and

Universidad de los Andes

Salvador Valdes, Universidad Catolica de Chile,

"Export Drawbacks and Vertical Control"

Discussant: Alicia Puyana, CRESET

Aaron Tornell, Columbia University, "Real versus

Financial Investment: Can Tobin Taxes Eliminate

the Irreversibility Distortion?"

Discussant: Andres Velasco, Columbia University

Winston Fritsch and Gustavo H.B. Franco, PUC-Rio

de Janeiro, "Direct Foreign Investment and

Industrial Restructuring in Brazil"

Discussant: Astrid Martinez, Universidad Nacional

de Colombia

J. Saul Lizondo, Universidad de Tucuman, Argentina,

and Peter Montiel, International Monetary Fund,

"Dynamics of Devaluation and Equivalent Fiscal

Policies for a Small Country with Optimizing Agents"

Discussants: Manuel Ramirez, Universidad de los

Andes, and Alberto Carrasquilla, Banco de la

Republica

Raul Ramos, Banco de Mexico, "Real Wages and the

Transfer Problem: A Mexican Variation on an Old

Theme"

Discussants: Geoffrey Carliner, NBER, and Alvaro

Reyes, CCRP

Alarcon began the meetings with a review of Latin America's
debt problems. He emphasized that the problem was created jointly by
foreign banks, creditor governments, and debtor governments. Since the
onset of the crisis in 1982, most debtor countries have endured very
stringent economic conditions. Alarcon suggested that a successful
solution to the debt problem probably would also be a joint undertaking,
including new credit provided by the IMF and The World Bank, regulatory
accommodation by creditor governments, and responsible macroeconomic policies by debtor governments.

Dornbusch and Edwards first discuss the main characteristics of
populist regimes in Latin America, emphasizing their reliance on
macroeconomic policies to redistribute income. Then they define four
phases historically observed in most populist experiments, including
Chile in 1970-3 and Peru under Alan Garcia now. The first is
characterized by demand-driven expansion of output. Pressures on
inflation are dealt with through generalized price controls. In the
second stage, bottlenecks appear and inflation increases significantly.
The third phase is characterized by pervasive shortages, very high
inflation, capital flight, and real wages that are significantly below
their initial level. At this point, some timid and ineffective
stabilization programs usually are tried. During the fourth phase, a new
government tries to implement an orthodox stabilization program.

Bacha expands the traditional model of growth to include the fiscal
gap as a third constraint on the growth of highly invested developing
countries. This requires the assumptions that domestic capital markets
for government bonds are very limited and that there is a strong
complementarity in these countries between investment in private sector
infrastructure and investment in the private sector. Bacha also studies
the impact of net foreign transfers on economic growth and the price
stability of fiscally constrained economies. Finally, he discusses the
role of external conditionality accompanying debt relief measures.

Fernandez and Glazer examine the possibility of collusive behavior
among countries negotiating their debts with the same bank. If the bank
and the countries take turns making offers over time, a country will be
motivated to reach an agreement if the bank imposes a penalty
(restriction of trade credits) in each period in which an agreement is
not reached. However, punishing a country is also costly to the bank. If
countries are able to commit to a cartel, they can exploit the fact that
penalizing two countries simultaneously is costlier to the bank than
penalizing them one at a time. Thus, each country pays less than if it
were the sole country negotiating with the bank. However, there is a
unique equilibrium in which the bank is able to exploit each
country's fear that the other country will reach an earlier
agreement with the bank; this permits the bank to extract the same
payment from each country as it would if there were only one country or
if its cost function were linear.

Borensztein assesses the relative magnitude of two mechanisms
through which foreign debt decreases productive investment the debt
overhang and credit rationing. The debt overhang acts as a
"tax" on production, while rationing implies higher domestic
interest rates. However, the effect of credit rationing may be more
powerful. This implies that additional lending would be a stronger (or
cheaper) policy instrument than debt reductions from the point of view
of increasing productive investment in debtor economies.

Montenegro presents a simple model of the Colombian coffee economy
within the institutional framework established by the International
Coffee Agreement. The real and financial aspects of coffee are specified
separately, and Montenegro studies the handling of policy instruments.
He also analyzes the conditions for the sector's stability and its
static comparative properties. Finally, he explores the behavior of the
Colombian coffee economy within organizational frameworks different from
the International Coffee Agreement: that is, perfect competition and
monopolistic competition.

According to a dataset collected by UNCTAD, Latin American exports
are not subject to trade barriers as often as the exports of other
regions, such as Australia/New Zealand and Japan. Leamer controls for
differences in commodities to estimate the effects of trade barriers on
Latin American exports. The two methods he uses lead to quite different
results. For example, he finds that exports from Brazil, when compared
to 14 imports, are suppressed by trade barriers either by 12 or by 46
percent. The larger estimate comes from accounting more accurately for
differences in comparative advantage among the countries he considers.

Ocampo analyzes the effects of changes in Colombia's trade
regime since 1976: substantial liberalization during 1976-81, then high
restrictions from 1982 to 1985, and finally moderate liberalization
since 1985. In his simple Keynesian model, GDP in the manufacturing and
service sectors is determined by real aggregate demand, and domestic
markets for traded goods are imperfectly competitive. Ocampo estimates
that tighter restrictions on imports raised GDP by 4.4 percent between
1982:4 and 1985:2, while liberalization reduced GDP by 1 percent during
the remainder of 1985. Since then, liberalization has had very small
effects on output.

Valdes studies the export drawback regime that has been in force in
Chile and the changes it has suffered lately. Export drawbacks refund
value-added and excise taxes on Chilean imports. Valdes finds that the
operating rules attached to the new drawback regime can lead to an
increase in national welfare. However, this increase is limited because
the detailed operating rules in effect limit the refunds to large
monopolistic producers who sell to exporters. Small producers and
exporters themselves are not able to obtain the refunds. Thus all of the
benefits of this export scheme accrue to large monopolists.

In the recent past, several countries have failed to achieve
significant real capital investment despite episodes of large capital
inflows. Although real projects with seemingly high returns are
available, investors prefer to wait for the correct time to invest.
Tornell addresses this issue by considering a two-sector economy where
investment in real capital is irreversible and financed by debt.
Furthermore, the interest rate, which is determined in the financial
sector, is random because of volatile expectations. In this economy the
expected return on real capital is above the expected interest rate.
This is because the option to wait for lower interest rates has a
positive value. In the presence of rumors, taxes on international
financial transactions (Tobin taxes) reduce the variance of the domestic
interest rate, while leaving its mean unchanged. As a result, they
induce more investment in irreversible real capital.

Fritsch and Franco review recent industrial policies in Brazil.
They first explain how differential access to the technology can
determine the northern NICs' patterns of trade in manufactures.
They then address three issues: 1) the implications of shortening
product cycles; 2) feasible levels of vertical integration; and 3)
combinations of firm size and foreign participation that could enhance
technology acquisition.

Lizondo and Montiel examine the effects of a nominal exchange rate devaluation, a temporary tax increase, and temporary reductions in
government spending on traded and nontraded goods. They find that
devaluations and temporary increases in taxes reduce private sector
expenditure possibilities when compared with temporary reductions in
public sector expenditure. Additional interest earnings transferred to
the private sector increase its expenditure possibilities when compared
with additional earnings used to increase public sector expenditure. In
all cases, the implications for the real exchange rate and for the
various accounts of the balance of payments depend on whether the
changes in public sector expenditures take place in traded or in
nontraded goods.

Ramos briefly summarizes changes in the Mexican economy since the
onset of the debt crisis. Transfers to the rest of the world have
averaged 6 percent of GDP annually. To finance these transfers, the real
minimum wage fell 47 percent and the share of wages in GDP fell from 38
to 28 percent between 1981 and 1986. Government spending on everything
but interest payments fell from 36 percent of GDP in 1982 to 25 percent
in 1987. However, tax revenues remained stable at 10-11 percent of GDP.
Ramos analyzes these changes with a two-good model in which the
government raises revenues through taxes on labor and income and an
inflation tax. In this model, the inflation tax depresses new
investment. As the labor force grows more rapidly than the capital
stock, real wages fall.

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